US SEC implemented new rules to improve risk management in dealings within the Treasury market

The US Securities and Exchange Commission recently implemented new rules mean to improve risk management practices in central counterparty dealings with the US Treasury market. According to the regulator, the new rules will require clearing agencies that have dealings in the market to implement policies that would ensure the clearing of specific secondary market transactions.

In addition, clearing agencies will be obligated to calculate and collect margin for customer and house transactions separately, as well as facilitate access to clearing, even when it comes to indirect market participants.

The SEC’s new rules to impact risk management in Treasury market dealings

The regulator’s plan is to use the amendments to facilitate more comprehensive clearing of securities transactions in the US Treasury markets. Furthermore, the changed rules will mitigate risks for clearing agencies while at the same time, they will promote additional central clearing in the financial market that is considered to be quite critical.

Commenting on the significance of the rules, SEC Chair Gary Gensler said that the Treasury market is $26 trillion large, and as such, foundational to the country’s capital markets.

Meanwhile, a major portion of Treasury markets remains uncleared, which poses systemic risks. He also explained that the adoption of the new rules is a step toward addressing these risks, which will be done by improving customer clearing and expanding the scope of transactions that are required to be cleared.

As for the specific secondary market transactions that are targeted, those include interdealer broker transactions, repurchase and reverse repurchase agreements collateralized by the Treasury securities, as well as transactions that involve registered broker-dealers and government securities dealers.

Next, the broker-dealers will be allowed to count customer margin deposited at clearing agencies as a debit in the customer reserve formula. As for clearing agencies, they will be obligated to calculate and collect margin for customer and house transactions separately, with the exceptions being made for transactions involving sovereign entities, central banks, or international individuals or financial institutions.

Moving forward, the SEC intends to implement these amendments in two separate phases. The first one will focus on splitting the house and customer margin, as well as ensuring access to central clearing. This first phase is expected to be completed by March 31, 2025. As for the second phase, it will see the mandatory clearing of specific transactions, and this is expected to be concluded by December 31, 2025, for transactions staggered for cash, and June 30, 2026, for repurchase transactions.

Commissioner Peirce questions the wisdom of introducing the new rules

While the SEC seems quite sure about introducing the new rules, SEC Commissioner Hester M. Peirce recently published a statement titled Careening Toward Clearing. In it, she expressed concerns regarding the new rules and cautioned against hasty implementation of mandatory clearing.

Instead, she argued that the approach should be more gradual and adaptable, saying that moving directly to a clearing mandate could be disruptive for the market. It could also lead to increased costs regarding transactions, as well as liquidity and operational issues and challenges.

Furthermore, she suggested that the regulator first deals with disincentives to clearing and keep an eye on the market changes before taking additional regulatory actions, noting that the amendments lack the flexibility to adjust or halt the process if that ends up being necessary.

She also asked a number of questions concerning the impact on market liquidity, statutory limits of directives to clearing agencies, competition, pricing, as well as the potential risk of concentrating transactions in a single clearinghouse.